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Strengthening Financial Infrastructure - Deposit Insurance and Lending of Last Resort

  • Morten Balling
    ()

Registered editor(s):
  • Richard Dale
  • Franco Bruni
  • Christian de Boissieu

1) Deposit Insurance in Theory and Practice by Richard Dale. 2) Lending of Last Resort and Systemic Stability in the Eurozone by Christian de Boissieu and Franco Bruni. The first paper overviews theoretical arguments for and against deposit insurance, a system that can be aimed at consumer protection and/or at financial stability. But deposit protection, by reducing risk, can cause " moral hazard" , in particular in relations to institutions potentially "too-big-to-fail" . The US and Japanese experiences with deposit insurance are useful lessons for Europe as they demonstrate how badly can market participants be affected by moral hazard. The second paper discusses lending of last resort in the Eurozone. The authors support the ECB's view that this function must be confined to play a minor role and that it must be handled with 'constructive ambiguity'. However, they think explicit decisions and a clear division of responsi-bilities are needed to ensure that its role is really minor and that the ambiguity is in fact constructive. They call for euro-wide standards of supervision and for the establishment of a 'European Observatory of Systemic Risk'. They also recommend " prompt corrective action" with the authorities ready to close banks before they become insolvent, if they do not comply with their instructions to keep high capital ratios. Read together the two papers offer useful insights into the current debate about how to make the financial infrastructure of Europe more robust.

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This book is provided by SUERF - The European Money and Finance Forum in its series SUERF Studies with number 7 and published in 2000.
ISBN: 90-5143-030-1
Handle: RePEc:erf:erfstu:7
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References listed on IDEAS
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  1. Joe Peek & Eric S. Rosengren, 1996. "Will legislated early intervention prevent the next banking crisis?," Working Papers 96-5, Federal Reserve Bank of Boston.
  2. Rolf Skog, 1997. "Does Sweden Need a Mandatory Bid Rule? A critical analysis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  3. Goodhart, Charles & Schoenmaker, Dirk, 1995. "Should the Functions of Monetary Policy and Banking Supervision Be Separated?," Oxford Economic Papers, Oxford University Press, vol. 47(4), pages 539-60, October.
  4. John Calverley & Sarah Hewin & Kevin Grice, 2000. "Emerging Stock Markets After the Crisis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  5. Miller, Geoffrey P., 1996. "Is deposit insurance inevitable? Lessons from Argentina," International Review of Law and Economics, Elsevier, vol. 16(2), pages 211-232, June.
  6. David Llewellyn, 1999. "The New Economics of Banking," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  7. Giovanni, Alberto, 1993. "Central banking in a monetary union: reflections on the proposed statute of the European Central Bank," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 191-230, June.
  8. Joseph Bisignano, 1998. "Towards an Understanding of the Changing Structure of Financial Intermediation: An Evolutionary Theory of Institutional Survival," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
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